Crowdsourcing works!

by John Quiggin on September 15, 2008

In the comments to my last post, reader Peter Schaeffer provides exactly what I asked for: a breakdown of the discrepancy between 30 per cent growth in US household income over the last 40 years and 117 per cent growth in income per person. In addition to the factors I’d mentioned (falling household size and growing inequality) Schaeffer notes two more: the fact that GDP has grown faster than national income and the fact that prices faced by households (the CPI-U-RS) have risen faster than the GDP deflator. He provides the details to show that this fully explains the discrepancy.

What should we make of this. As far as the situation of the average American is concerned, the only correction we need to make to the household income figures is to correct for changes in household size. That makes the increase over the last 40 years about 63 per cent, or an annual growth rate of 1.2 per cent. By contrast, the 117 per cent growth in GDP per person implies a rate of just under 2.0 per cent. So, changes in GDP per person (let alone changes in total GDP) are essentially irrelevant as a guide to how the average household is doing.

And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades. Growth in consumption has been driven largely by increasing access to debt, a process that now looks to have run out of road. That would seem to indicate a looming social crisis. But the coming election will still turn on whether Obama called Palin a pig.

Share this:

I just want to reiterate Obama’s denial-related clarification: if he had been referring to Palin in that remark, he would have been, technically-speaking, referring to Palin as the lipstick and McCain as the pig.

Er, there’s a view that the retail price index overstates inflation because of hard-to rate quality improvements (new gadgets, reliability). Couldn’t there be a gap with the GDP deflator, since experts are more likely to agree on quality in capital goods, even rapidly changing ones like routers and optical fibre cables? This doesn’t affect your question or Schaeffer’s answer, but it makes a (modest) difference once you start interpreting income in welfare terms.
Lipstick/pig fans: please discuss elsewhere. My pennyworth here.

there’s a view that the retail price index overstates inflation because of hard-to rate quality improvements

There’s also an argument that it *understates* inflation, since in general it does not factor in quality decreases at all, even where they are arguably rather important, e.g. retail (big box = lower prices, worse service/convenince) and air travel. A few years ago there were some very strong arguments by people like Robert Gordon and Dean Baker that quality improvements in computers were being exaggerated, again resulting in understated inflation, because the hedonic pricing model used assumed that consumers were paying for e.g. memory and chip speed rather than functionality. Dunno what the status of that debate is, but in general, one should definitely not assume that errors in measuring quality change will be in only one direction.

Oh, and another important point is that a large and increasing fraction of personal income goes to debt payments rather than purchases of goods and services. So deflating personal income by the CPI exaggerates the actual improvement in living standards.

There was a very good article on this by Eric Nilsson a few years back. (In RRPE, so John Q. won’t want to read it, but others may find it interesting.)

Lemuel, I’m at least mildly bemused by this snark. I’ve both written for and been on the board of the Journal of Australian Political Economy which is the closest Oz equivalent to RRPE.

It’s true that I think that methodological heterodoxy is mostly a waste of time, and a distraction from matters of actual concern. By contrast, Nilsson’s use of standard neoclassical economics (he cites Econometrica, for example) to derive leftwing political conclusions is exactly the kind of thing I try to do.

Sure one can employ a little snark on behalf of the wounded honor of heterodoxy on Crooked Timber? But truth be told I don’t really disagree with you — it wasn’t until I got to UMass-Amherst that I learned I wasn’t a Marxist because I’m not interested in value theory.

I don’t know why you all are so dismissive of the value theory. I’m not an expert, but obviously it’s not an economic concept, it’s a socio-economic concept. I don’t remember the details, but I think in Parallax View Zizek has a convincing one page rundown on the meaning and dialectics of it and it comes out fine.

obviously it’s not an economic concept, it’s a socio-economic concept.

Oh, I agree. And for those who don’t care for Zizek, David Harvey has a very good discussion of the same point in The Limits to Capital.

But there is a segment of heterodoxy that treats value, as Marx (sometimes) did, in a more formal quantitative way — the transformation problem and all that. That’s the sort of thing John Q. thinks is a waste of time, I guess — and I more or less agree, tho I’m not at all sure its imminent extinction is a good thing.